Determining Filing Requirements for Limited Liability Companies

 Posted on September 08, 2017 in Taxation Law

Limited liability companies (LLCs) are often touted for their tax flexibility. In fact, that is one of the reasons why people choose to set up their business as an LLC.

LLCs are commonly called pass-through tax entities for federal income tax purposes. This is because the LLC will not be responsible for these taxes. Instead, the LLC’s individual members will pay the federal income taxes.

However, LLCs must comply with certain filing requirements and possibly pay a state minimum tax in California and may need to pay a California LLC fee. The proper forms and amount of taxes and fees will be determined by the setup of the LLC and also by certain elections made.

California follows the federal check-the-box regulations. Accordingly, LLCs are classified as follows:

• LLCs with more than one member default to a partnership;
• LLCs with only one member default to a disregarded entity; and
• LLCs may also elect to be treated and taxed as a corporation.

LLCs Treated as a Partnership or as a Disregarded Entity

These types of LLCs are treated similarly. Both of these types of LLCs will be required to file California Form 568 (“Limited Liability Company Return of Income”). Additionally, they must pay $800 in an annual franchise fee to California.

These LLCs may also be required to pay an LLC fee if the California total income is at least $250,000. LLCs with multiple members will also need to file federal forms.

LLCs Treated and Taxed as a Corporation

LLCs may elect to be treated as a corporation and be subject to California and federal corporate tax. These types of LLCs that do business in California as a domestic LLC defined in R&TC Section 23101, have filed articles of organization or application to register with the Secretary of State as a foreign LLC, or have a California source income to report.

Such LLCs must file California Form 100 (“Corporation Franchise or Income Tax Return”), California Form 100S (“S Corporation Franchise or Income Tax Return”), or California Form 100W (“California Corporation Franchise or Income Tax Return - Water’s-Edge Filers”).

All California LLCs must pay a California’s franchise tax, $800 minimum, and additional income tax as applicable. In addition, the LLCs will have to file a tax return with the IRS.

Payroll Taxes and LLCs

Another consideration for LLCs is payroll taxes. In California, payroll taxes include unemployment insurance, employment training tax, state disability insurance, and state income tax withholding.

While the Internal Revenue Service and the Franchise Tax Board treat an LLC as a sole proprietorship, partnership, or corporation, the Employment Development Department (EDD) treats an LLC as a unique entity type when determining if payroll taxes are owing.

Payroll taxes are determined depending on how the LLC is classified for federal income tax purposes. For example, under EDD rules, any member of an LLC that is treated as a corporation is considered an employee, and any compensation paid to these members is considered wages subject to California payroll taxes. On the other hand, if the LLC is treated as a partnership, a member of the LLC is not considered an employee for payroll taxes.

A California LLC Tax Lawyer Can Help Your Business

If you are having trouble understanding what the most advantageous tax filing strategies may be for your business or LLC, contacting a lawyer can save you time and money. A tax lawyer will also be sure to advise you on any legal issues presented in your situation.

Contact the knowledgeable San Jose LLC tax attorney at John D. Teter Law Offices at 408-866-1810 to set up your first appointment today.

Sources:

https://www.ftb.ca.gov/businesses/Structures/LLC-Filing-Requirements.shtml?WT.mc_id=Business_Slab_LLC-FR

https://www.ftb.ca.gov/forms/2016/16_568.pdf

http://www.edd.ca.gov/pdf_pub_ctr/de231llc.pdf